In the past few columns, we learnt the importance of documents/identification like Aadhaar, PAN, etc. We also learnt about a process called eKYC, which is required for getting started with mutual funds. Lastly, we learnt how investment products like mutual funds can be purchased online without the need for an agent or intermediaries like brokers, who may have limited or no value to add.
After the most recent column, a lot of you had got your ducks in a row and had gone as far as exploring the websites of mutual fund companies. A number of you had asked me where to invest. In this column, we will see how we can get our basic understanding about investing and start being our own money experts.
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For pretty much all of you, your investments should go into equity mutual funds. But what exactly are these equity mutual funds? You see, stock exchanges like Bombay Stock Exchange and National Stock Exchange have a large number of stocks listed. What does listed mean? When a stock is listed on an exchange, all that means is that it is available for buying and selling. Do you think Hero motorcycles are awesome? Are you happy to pay up a premium to other motorcycle brands in order to get your hands on Hero motorbikes? Then Hero must be doing something right as a business. They are producing something that their target market likes. So, with such strong customer love, Hero Motocorp (the company that makes Hero motorcycles) is a great company to own and operate. Of course, the company is primarily owned and operated by the founder (the Munjals). But because it is listed on both BSE and NSE, it is available for you to buy (and also sell).
So, you can become a part owner of Hero Motocorp by buying a share or two of the company. If you do that with a long-term horizon, you are said to be investing in the company. Please note that just because you have a few shares and are technically a part owner, you cannot barge into the company headquarters and start ordering people around. Things don’t work that way. Being a part owner will give you a proportional share of the company’s “economic interest” — profits and dividends. You can even vote when the company makes major decisions and requires shareholder approval. Bear in mind that unlike a democracy where every person gets a single vote, in the world of commerce, the more shares you have, the more votes you get.
The stock market has several companies, large and small, listed. You can buy any or all of them, depending on how much you have. Which one of this should you buy? Often times, people who lose their money in the stock market are advised poorly by their brokers or friends and are looking for quick gains. They buy an obscure company stock that is supposedly going to go up dramatically, but for some strange reason, the stock goes south after they buy it. In the next column, we will see how we can take intelligent decisions regarding what to buy, in a consistent manner with just an hour or so of effort every week.
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The writer is an alumnus of IIM Bangalore and co-founder, Money Wizards. chari.venkatesh@gmail.com